Portfolio Allocation

This is a very subjective question, but I was wondering what are the factors you would consider/had considered for portfolio allocation?

I heard in one of the resource videos/ round table discussions that the trader allocated 50% of funds in Mutual funds, 40% in monthly income options trading (mostly from the excellent trading systems discussed in this forum) and the remaining 10% on spec trading.
Those percentages look great for a big account size, but if one were to start on a smaller account (say 10K) , considering the monthly fees on the backtesting softwares etc, what would be your recommendation?

Depends on how old you are too. Being more aggressive/growth oriented when you're younger makes sense since you have a longer investment horizon and have time to absorb drawdowns. As you get older capital preservation becomes more important.
Regarding having 50% in mutual funds, I've met option traders who've told me that owning stocks/funds outright is too risky for their taste. I realize that financial planners will say the opposite: that option trading is too risky and buying and holding good companies/funds is the safest path.

Starting trading (as opposed to "investing" whatever that is) with a small account makes sense. I have multiple accounts, one of which I consider my trading account. The rest are IRAs and 401K rollovers with a mix of stock and bond mutual funds. I'm currently 58 years old so I'm becoming more conservative. If you're young and starting out, open an account with an amount that you're willing to lose but that loss won't land you in a homeless camp.

Tom Sosnoff - founder of TOS - has a number of videos at TastyTrade/Dough discussing the proper number of trades per year to get very close to your expected value. So if your trading plan offers an expected value of say 5 percent annualized per trade...how many trades do you need per year to get very close to your expected value...say 4.9 %. He then reveals high frequency traders....think top quartile....at TOS/TT...trade 2 times a month...24 times a year gets you in the High Frequency club based on actual trading activity. But at best that level of trading gives you variance that only assures a realized expected value on the order of 2.6% -- yikes!

So Tom and his math guru run the numbers...and its simple...you need "more occurrences"...more trades...to get near 4.9%. How many....well..like 50 a day. Just 1000 a year...and your variance goes down and you get very near your theoretical expected value. By the way, Tom then claims he executes about 250 trades a day for more than 5000 trades a year. Yikes...that's like a trade every few minutes of the trading day. Not for me. I don't see how for Tom either.

That's a bit of an extreme example of portfolio mix...but proper trade sizing...and hence portfolio mix...is just going to be a challenge at $10,000.

Personally, at $10,000 starting level to actively trade I believe you need to accept that your activity level is simply high risk and you need to accept that you may lose a good portion of the account as the price of education in your start up cost phase. At $10,000 you must simplify -- Focus on one strategy you intend to master at half of your account...keep cash at $5,000...get comfortable in back testing/paper trading....but most importantly...start trading small...for 3 months...6 months...win small and lose small...and get experience.

This is a very subjective question, but I was wondering what are the factors you would consider/had considered for portfolio allocation?

Click to expand...

Late answer, but I thought I would toss out a few ideas on portfolio allocation. There are so many "well it depends factors" there is no single right answer. But here are some general thoughts.

Having too big a percent of your portfolio in options trades puts people at risk for getting their whole account wiped out from a flash crash.

Those switching from mutual funds to trading often do as you suggest: have half the account in a "core position" of what they're used to; funds which have volatility but won't blow up. Then about 30% in options trades, the rest cash. The younger you are the more risk you can handle.

Most recommend not putting more than 5-10% of your account at risk in any one position. If I understand correctly, people here use way, way more than that, and rely on stop orders or mental limits to exit a trade if they incur a max loss of 5-10% of the capital required as a worst case. I personally fear for those who do that without a very strong downside hedge against a big gap down in the market. I'm really interested in the Space Trip Trade for that reason.

I like the tail end of Robert's comments - take it slow, realize it's a learning experience, keep half in cash for now, and trade extra small for the first several months.

I"m taking Stevegee's approach as I'm close to that age and needing to be more conservative. I'm doing traditional investing with a small number of covered calls or collars in my IRA accounts and have a much smaller value account at TDA for all my active options trading and learning.
Best wishes!

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